Turtle Beach Corp 10-Q

Item 1. Financial Statements. Turtle Beach Corporation Condensed Consolidated Statements of Operations ( unaudited) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2023 2022 2023 2022 (in thousands, except per-share data) Net revenue $ 47,982 $ 41,300 $ 99,426 $ 87,962 Cost of revenue 36,110 33,418 73,415 66,051 Gross profit 11,872 7,882 26,011 21,911 Operating expenses: Selling and marketing 10,351 11,587 19,874 22,416 Research and development 4,189 5,136 8,290 10,388 General and administrative 13,125 12,532 20,132 18,767 Total operating expenses 27,665 29,255 48,296 51,571 Operating loss ( 15,793 ) ( 21,373 ) ( 22,285 ) ( 29,660 ) Interest expense (income) ( 17 ) 84 146 193 Other non-operating expense, net 198 1,109 318 1,828 Loss before income tax ( 15,974 ) ( 22,566 ) ( 22,749 ) ( 31,681 ) Income tax benefit ( 54 ) ( 4,740 ) ( 124 ) ( 7,379 ) Net loss $ ( 15,920 ) $ ( 17,826 ) $ ( 22,625 ) $ ( 24,302 ) Net loss per share Basic $ ( 0.93 ) $ ( 1.08 ) $ ( 1.34 ) $ ( 1.49 ) Diluted $ ( 0.93 ) $ ( 1.08 ) $ ( 1.34 ) $ ( 1.49 ) Weighted average number of shares: Basic 17,156 16,500 16,869 16,348 Diluted 17,156 16,500 16,869 16,348 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 2 Turtle Beach Corporation Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 (in thousands) Net loss $ ( 15,920 ) $ ( 17,826 ) $ ( 22,625 ) $ ( 24,302 ) Other comprehensive income (loss): Foreign currency translation adjustment ( 35 ) ( 1,090 ) 410 ( 1,519 ) Other comprehensive income (loss) ( 35 ) ( 1,090 ) 410 ( 1,519 ) Comprehensive loss $ ( 15,955 ) $ ( 18,916 ) $ ( 22,215 ) $ ( 25,821 ) See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 3 Turtle Beach Corporation Condensed Consolida ted Balance Sheets June 30, December 31, 2023 2022 (unaudited) ASSETS (in thousands, except par value and share amounts) Current Assets: Cash and cash equivalents $ 15,787 $ 11,396 Accounts receivable, net 20,254 43,336 Inventories 67,831 71,252 Prepaid expenses and other current assets 8,927 9,196 Total Current Assets 112,799 135,180 Property and equipment, net 5,691 6,362 Goodwill 10,686 10,686 Intangible assets, net 2,238 2,612 Other assets 8,124 8,547 Total Assets $ 139,538 $ 163,387 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Revolving credit facility $ — $ 19,053 Accounts payable 34,036 19,846 Other current liabilities 21,808 25,433 Total Current Liabilities 55,844 64,332 Income tax payable 2,196 2,076 Other liabilities 7,443 8,038 Total Liabilities 65,483 74,446 Commitments and Contingencies Stockholders’ Equity Common stock, $ 0.001 par value - 25,000,000 shares authorized; 17,309,270 and 16,569,173 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 17 17 Additional paid-in capital 214,245 206,916 Accumulated deficit ( 139,223 ) ( 116,598 ) Accumulated other comprehensive income (loss) ( 984 ) ( 1,394 ) Total Stockholders’ Equity 74,055 88,941 Total Liabilities and Stockholders’ Equity $ 139,538 $ 163,387 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 4 Turtle Beach Corporation Condensed Consolidated S tatements of Cash Flows (unaudited) Six Months Ended June 30, 2023 June 30, 2022 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 22,625 ) $ ( 24,302 ) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 1,948 2,458 Amortization of intangible assets 513 623 Amortization of debt financing costs 75 94 Stock-based compensation 6,929 3,567 Deferred income taxes ( 209 ) ( 7,110 ) Change in sales returns reserve ( 2,419 ) ( 4,992 ) Provision for obsolete inventory ( 1,098 ) ( 1,289 ) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 32,685 32,152 Inventories 5,457 ( 21,288 ) Accounts payable 7,452 ( 9,914 ) Prepaid expenses and other assets 691 1,055 Income taxes payable ( 261 ) 1,550 Other liabilities ( 4,928 ) ( 13,851 ) Net cash provided by (used for) operating activities 24,210 ( 41,247 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ( 1,252 ) ( 1,207 ) Net cash used for investing activities ( 1,252 ) ( 1,207 ) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on revolving credit facilities 99,785 36,209 Repayment of revolving credit facilities ( 118,838 ) ( 20,502 ) Proceeds from exercise of stock options and warrants 1,358 538 Repurchase of common stock ( 974 ) — Debt issuance costs ( 80 ) — Net cash provided by (used for) financing activities ( 18,749 ) 16,245 Effect of exchange rate changes on cash and cash equivalents 182 ( 634 ) Net increase (decrease) in cash and cash equivalents 4,391 ( 26,843 ) Cash and cash equivalents - beginning of period 11,396 37,720 Cash and cash equivalents - end of period $ 15,787 $ 10,877 SUPPLEMENTAL DISCLOSURE OF INFORMATION Cash paid for interest $ 226 $ 108 Cash paid (received) for income taxes $ ( 137 ) $ ( 2,539 ) See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 5 Turtle Beach Corporation Condensed Consolidated Statement o f Stockholders ’ Equity (unaudited) Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Shares Amount Capital Deficit Income (Loss) Total (in thousands) Balance at December 31, 2022 16,569 17 206,916 ( 116,598 ) ( 1,394 ) $ 88,941 Net loss — — — ( 6,705 ) — $ ( 6,705 ) Other comprehensive income, net of tax — — — — 445 $ 445 Issuance of restricted stock 14 — — — — $ - Stock options exercised 21 — 124 — — $ 124 Stock-based compensation — — 1,959 — — $ 1,959 Balance at March 31, 2023 16,604 $ 17 $ 208,999 $ ( 123,303 ) $ ( 949 ) $ 84,764 Net loss — — — ( 15,920 ) — $ ( 15,920 ) Other comprehensive loss, net of tax — — — — ( 35 ) $ ( 35 ) Issuance of restricted stock 469 — — — — $ - Stock options exercised 322 — 1,234 — — $ 1,234 Stock-based compensation — — 4,986 — — $ 4,986 Repurchase of common stock ( 86 ) — ( 974 ) — — $ ( 974 ) Balance at June 30, 2023 17,309 $ 17 $ 214,245 $ ( 139,223 ) $ ( 984 ) $ 74,055 Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Shares Amount Capital Deficit Income (Loss) Total (in thousands) Balance at December 31, 2021 16,168 16 198,278 ( 57,052 ) 127 $ 141,369 Net loss — — — ( 6,476 ) — ( 6,476 ) Other comprehensive loss, net of tax — — — — ( 429 ) ( 429 ) Issuance of restricted stock 30 — — — — — Stock options exercised 47 — 361 — — 361 Stock-based compensation — — 1,537 — — 1,537 Balance at March 31, 2022 16,245 $ 16 $ 200,176 $ ( 63,528 ) $ ( 302 ) $ 136,362 Net income — — — ( 17,826 ) — ( 17,826 ) Other comprehensive income, net of tax — — — — ( 1,090 ) ( 1,090 ) Issuance of restricted stock 257 — — — — — Stock options exercised 24 1 176 — — 177 Stock-based compensation — — 2,030 — — 2,030 Balance at June 30, 2022 16,526 $ 17 $ 202,382 $ ( 81,354 ) $ ( 1,392 ) $ 119,653 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 6 Turtle Beach Corporation Notes to Condensed Consolidated Financial Statements (unaudited) Note 1. Background and Basis of Presentation Organization Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in White Plains, New York and incorporated in the state of Nevada in 2010, is a premier audio and gaming technology company with expertise and experience in developing, commercializing, and marketing innovative products across a range of large addressable markets under the Turtle Beach® and ROCCAT® brands. Turtle Beach is a worldwide leader of feature-rich headset solutions for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers (“PC”), tablets and mobile devices. ROCCAT is a gaming keyboards, mice and other accessories brand focused on the PC peripherals market. VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach Corporation and the owner of Voyetra Turtle Beach, Inc. (“VTB”), was incorporated in the state of Delaware in 2010. VTB, the owner of Turtle Beach Europe Limited (“TB Europe”), was incorporated in the state of Delaware in 1975 with operations principally located in White Plains, New York. Basis of Presentation The accompanying interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire fiscal year. The December 31, 2022 Condensed Consolidated Balance Sheet has been derived from the Company’s audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 29, 2023 (“Annual Report”). These financial statements should be read in conjunction with the annual financial statements and the notes thereto included in the Annual Report that contains information useful to understanding the Company’s businesses and financial statement presentations. Use of estimates : The preparation of accompanying unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates may change, as new events occur and additional information is obtained, and will be recognized in the consolidated financial statements in the period in which such changes occur. Future actual results could differ materially from these estimates. Note 2. Summary of Significant Accounting Policies The preparation of consolidated annual and quarterly financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Company’s consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company can give no assurance that actual results will not differ from those estimates. There have been no material changes to the significant accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report. 7 Note 3. Fair Value Measurement The Company follows a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: • Level 1 — Quoted prices in active markets for identical assets or liabilities. • Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active, or other inputs that are observable or can be corroborated by observable market data. • Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt instruments and certain warrants. As of June 30, 2023 and December 31, 2022 , the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted. The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 Reported Fair Value Reported Fair Value (in thousands) Financial Assets and Liabilities: Cash and cash equivalents $ 15,787 $ 15,787 $ 11,396 $ 11,396 Revolving credit facility $ — $ — $ 19,053 $ 19,053 Cash equivalents are stated at amortized cost, which approximates fair value as of the consolidated balance sheet dates, due to the short period of time to maturity; and accounts receivable and accounts payable are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment. The carrying value of the Credit Facility approximates fair value, due to the variable rate nature of the debt, as of June 30, 2023 and December 31, 2022 . Note 4. Allowance for Sales Returns The following table provides the changes in our sales return reserve, which is classified as a reduction of accounts receivable: Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 (in thousands) Balance, beginning of period $ 6,639 $ 5,713 $ 7,817 $ 8,998 Reserve accrual 2,556 2,792 6,150 5,475 Recoveries and deductions, net ( 3,797 ) ( 4,499 ) ( 8,569 ) ( 10,467 ) Balance, end of period $ 5,398 $ 4,006 $ 5,398 $ 4,006 Note 5. Composition of Certain Financial Statement Items Inventories Inventories consist of the following: June 30, 2023 December 31, 2022 (in thousands) Finished goods $ 67,071 $ 70,407 Raw materials 760 845 Total inventories $ 67,831 $ 71,252 8 Property and Equipment, net Property and equipment, net, consists of the following: June 30, 2023 December 31, 2022 (in thousands) Machinery and equipment $ 2,622 $ 2,373 Software and software development 2,395 2,396 Furniture and fixtures 1,732 1,713 Tooling 10,488 9,901 Leasehold improvements 2,030 2,050 Demonstration units and convention booths 15,755 15,379 Total property and equipment, gross 35,022 33,812 Less: accumulated depreciation and amortization ( 29,331 ) ( 27,450 ) Total property and equipment, net $ 5,691 $ 6,362 Other Current Liabilities Other current liabilities consist of the following: June 30, 2023 December 31, 2022 (in thousands) Accrued employee expenses $ 2,508 $ 4,171 Accrued tax-related payables 2,889 4,159 Accrued marketing 2,609 4,147 Accrued royalty 1,596 2,527 Accrued freight 2,027 1,746 Accrued expenses 10,179 8,683 Total other current liabilities $ 21,808 $ 25,433 Note 6. Goodwill and Other Intangible Assets Acquired Intangible Assets Acquired identifiable intangible assets, and related accumulated amortization, as of June 30, 2023 and December 31, 2022 consisted of: June 30, 2023 Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships $ 8,085 $ 6,986 $ 1,099 Tradenames 3,066 2,378 688 Developed technology 1,884 1,557 327 Foreign currency ( 1,225 ) ( 1,349 ) 124 Total Intangible Assets $ 11,810 $ 9,572 $ 2,238 9 December 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships $ 8,085 $ 6,750 $ 1,335 Tradenames 3,066 2,147 919 Developed technology 1,884 1,495 389 Foreign currency ( 1,375 ) ( 1,344 ) ( 31 ) Total Intangible Assets $ 11,660 $ 9,048 $ 2,612 In connection with the October 2012 acquisition of TB Europe, the acquired intangible assets related to customer relationships is being amortized over an estimated useful life of thirteen years with the amortization being included within sales and marketing expense. In May 2019, the Company completed its acquisition of the business and assets of ROCCAT. The acquired intangible assets relating to developed technology, customer relationships, and trade name are subject to amortization. During the fourth quarter of 2022, the Company made the decision to increasingly leverage the Turtle Beach brand across our product portfolio including PC products over time. Due to this decision, the Company prepared an impairment calculation to determine the present value of the ROCCAT tradename asset using the relief from royalty method. As a result of the present value calculation, in the fourth quarter 2022, the Company recorded an impairment charge of $ 0.8 million for the ROCCAT tradename intangible asset. In January 2021, the Company completed its acquisition of the business and assets relating to the Neat Microphones business. During the fourth quarter of 2022, as part of the 2023 annual operating and strategic plan process, the Company made the decision to transition microphone products to the Turtle Beach brand. As a result of this decision, there was no longer a basis for carrying the remaining net intangible assets related to the Neat brand. In the fourth quarter 2022, the Company recorded an impairment charge of $ 1.1 million related to the remaining Neat net intangible assets. Amortization expense related to definite lived intangible assets of $ 0.0 million and $ 0.5 million was recognized for the three and six months ended June 30, 2023, respectively, and $ 0.3 million and $ 0.6 million was recognized for the three and six months ended June 30, 2022. As of June 30, 2023, estimated annual amortization expense related to definite lived intangible assets in future periods was as follows: (in thousands) 2023 $ 516 2024 1,003 2025 425 2026 170 Thereafter - Total $ 2,114 There were no changes in the carrying values of goodwill for the six months ended June 30, 2023 from the balance as of December 31, 2022 . Note 7. Revolving Credit Facility and Long-Term Debt June 30, 2023 December 31, 2022 (in thousands) Revolving credit facility, maturing April 2025 $ - $ 19,053 Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2023, respectively, and $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2022, respectively. Amortization of deferred financing costs was $ 33 thousand and $ 75 thousand for the three and six months ended June 30, 2023, respectively, and $ 47 thousand and $ 94 thousand for the three and six months ended June 30, 2022, respectively. 10 Revolving Credit Facility On March 5, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (the “Credit Facility”) with Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent and security trustee for Lenders (as defined therein), which replaced the then existing asset-based revolving loan agreement. The Credit Facility was amended on each of December 17, 2018, May 31, 2019, and March 10, 2023. The Credit Facility, as amended, expires on April 1, 2025 and provides for a line of credit of up to $ 80 million inclusive of a sub-facility limit of $ 15 million for TB Europe, a wholly-owned subsidiary of Turtle Beach. In addition, the Credit Facility provides for a $ 40 million accordion feature. On March 10, 2023, the Company entered into a Third Amendment to Amended and Restated Loan, Guaranty and Security Agreement (the “Third Amendment”), by and among the Company, VTB, TBC Holding Company LLC, TB Europe, VTBH, the financial institutions party thereto from time to time and Bank of America, as administrative agent, collateral agent and security trustee for the lenders. The Third Amendment provides for, among other things: (i) extending the maturity date of the Credit Facility from March 5, 2024 to April 1, 2025; (ii) updating the interest rate and margin terms; (iii) removing the FILO Loan facility; (iv) updating the sub-facility limit for TB Europe to $ 15 million; (v) increasing our undrawn commitment fee by 0.125 %; and (vi) transitioning the reference interest rates from LIBOR to BSBY, SONIA and EUIBOR, as applicable. The maximum credit availability for loans and letters of credit under the Credit Facility is governed by a borrowing base determined by the application of specified percentages to certain eligible assets, primarily eligible trade accounts receivable and inventories, and is subject to discretionary reserves and revaluation adjustments. The Credit Facility may be used for working capital, the issuance of bank guarantees, letters of credit and other corporate purposes. Amounts outstanding under the Credit Facility bear interest at a rate equal to (i) a rate published by Bank of America or the U.S. Bloomberg Short-Term Bank Yield Index (“BSBY”) rate for loans denominated in U.S. Dollars, (ii) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, (iii) and the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50 % to 2.50 % for base rate loans and UK base rate loans, and 1.50 % to 3.50 % for U.S. BSBY rate loans, U.S. BSBY daily floating rate loans and UK alternative currency loans. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.375 % to 0.50 % and letter of credit fees and agent fees. As of June 30, 2023, interest rates for outstanding borrowings were 10.75 % for base rate loans and 6.50 % for LIBOR rate loans, which reference interest rates were still in effect prior to the Libor Transition Amendments. The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as set forth in the Credit Facility). At such times, the Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the last day of each fiscal quarter. The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including the Company’s ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and transactions with affiliates, and encumber and dispose of assets. Obligations under the Credit Facility are secured by a security interest and lien upon substantially all of the Company’s assets. As of June 30, 2023, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $ 38.5 million. Note 8. Income Taxes In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions. However, to the extent that application of the estimated annual effective tax rate is not representative of the quarterly portion of actual tax expense expected to be recorded for the year, the Company determines the provision for income taxes based on actual year-to-date income (loss). Certain significant or unusual items are separately recognized as discrete items in the period during which they occur and can be a source of variability in the effective tax rates from quarter to quarter. The following table presents the Company’s income tax expense and effective income tax rate: Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 (in thousands) Income tax benefit $ ( 54 ) $ ( 4,740 ) $ ( 124 ) $ ( 7,379 ) Effective income tax rate 0.3 % 21.0 % 0.5 % 23.3 % 11 The effective tax rate for the three and six months ended June 30, 2023 was primarily impacted by a true-up to foreign incomes tax payable, partially offset by the change in U.S. valuation allowance, foreign taxes and interest on uncertain tax positions. The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold and establishes tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in the condensed consolidated statements of operations. As of June 30, 2023, the Company had uncertain tax positions of $ 2.9 million , inclusive of $ 0.8 million of interest and penalties. As required by the authoritative guidance on accounting for income taxes the Company evaluates the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred taxes will not be realized. The Company considers all positive and negative evidence in determining if, based on the weight of such evidence, a valuation allowance is required. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, the Company establishes a valuation allowance. Due to the significant 2022 pre-tax loss, coupled with cumulative book losses projected in early future years, the Company recorded a valuation allowance on its net U.S. deferred tax assets as of December 31, 2022. The Company’s continues to maintain this valuation allowance for the three months ended June 30, 2023. The Company is subject to income taxes domestically and in various foreign jurisdictions. The Company files U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. The federal tax years open under the statute of limitations are 2019 through 2021, and the state tax years open under the statute of limitations are 2018 through 2021. Note 9. Stock-Based Compensation Total estimated stock-based compensation expense for employees and non-employees, related to all of the Company’s stock-based awards, was as follows: Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 (in thousands) Cost of revenue $ 162 $ 96 $ 337 $ 122 Selling and marketing 410 539 900 937 Research and development 324 390 680 673 General and administrative 4,074 1,005 5,012 1,835 Total stock-based compensation $ 4,970 $ 2,030 $ 6,929 $ 3,567 On May 1, 2023, the Company announced that the Company and Juergen Stark, Chairman, Chief Executive Officer and President of the Company, have agreed that Mr. Stark would not continue as Chief Executive Officer and President of the Company, with his employment to terminate effective as of the close of business on June 30, 2023. On May 2, 2023, the Company entered into a separation agreement with Mr. Stark, resulting in an acceleration of the total stock-based compensation associated with equity awards granted to him. During the six months ended June 30, 2023 , the Company recorded a total of $ 4.0 million in stock-based compensation expenses and related payroll that would not have been recognized if Mr. Stark had not announced his retirement. The following table presents the stock activity and the total number of shares available for grant as of June 30, 2023: (in thousands) Balance at December 31, 2022 550 Options Cancelled 11 Restricted Stock Granted ( 504 ) Restricted Stock Forfeited 13 Performance Shares Unearned 94 Performance Shares Granted ( 163 ) Balance at June 30, 2023 1 12 On July 6, 2023, the Company’s stockholders approved an amendment to the plan to, among other things, (i) change the name to Turtle Beach Corporation 2023 Stock-Based Incentive Compensation Plan, and (ii) increase the number of shares of the Company’s common stock, par value $ 0.001 per share, authorized for issuance by 1,049,000 . Stock Option Activity Options Outstanding Number of Shares Underlying Outstanding Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value (in years) Outstanding at December 31, 2022 1,577,545 $ 7.66 5.81 $ 2,465,015 Options Granted - - Options Exercised ( 343,007 ) 3.96 Options Forfeited ( 11,485 ) 14.48 Outstanding at June 30, 2023 1,223,053 $ 8.63 4.44 $ 4,707,610 Vested and expected to vest at June 30, 2023 1,222,015 $ 8.73 4.44 $ 4,699,256 Exercisable at June 30, 2023 1,087,615 $ 8.76 4.14 $ 4,211,217 Stock options are time-based and the majority are exercisable within 10 years of the date of grant, but only to the extent they have vested. The options generally vest as specified in the option agreements subject to acceleration in certain circumstances. In the event participants in the plan cease to be employed or engaged by the Company, all vested options would be forfeited if they are not exercised within 90 days. Forfeitures on option grants are estimated at 10 % for non-executives and 0 % for executives based on evaluation of historical and expected future turnover. Stock-based compensation expense was recorded net of estimated forfeitures, such that expense was recorded only for those stock-based awards expected to vest. The Company reviews this assumption periodically and will adjust it if it is not representative of future forfeiture data and trends within employee types (executive vs. non-executive). Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The aggregate intrinsic value of options exercised was $ 2.4 million for the six months ended June 30, 2023. The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted as of the grant date. There were no new options granted during the six months ended June 30, 2023. The total estimated fair value of employee options vested during the six months ended June 30, 2023 was $ 0.6 million . As of June 30, 2023, total unrecognized compensation cost related to non-vested stock options granted to employees was $ 0.6 million , which is expected to be recognized over a remaining weighted average vesting period of 0.8 years. Restricted Stock Activity Shares Weighted Average Grant Date Fair Value Per Share Nonvested restricted stock at December 31, 2022 865,446 $ 18.75 Granted 504,092 9.97 Vested ( 546,939 ) 16.53 Shares forfeited ( 13,028 ) 17.78 Nonvested restricted stock at June 30, 2023 809,571 $ 14.80 As of June 30, 2023, total unrecognized compensation costs related to the nonvested restricted stock awards was $ 11.1 million , which will be recognized over a remaining weighted average vesting period of 2.7 years. Performance-Based Restricted Share Units As of June 30, 2023 , the Company had 256,342 performance-based restricted share units outstanding. The vesting of performance-based restricted share units is determined over a three-year period based on (i) the amount by which revenue growth exceeds a defined baseline market growth each year and (ii) the achievement of specified tiers of adjusted EBITDA as a percentage of net revenue each year, with the 13 ability to earn and vest into such units ranging from 0 % to 200 %. As of June 30, 2023 , achievement of the performance conditions associated with the 2023, 2022 and 2021 performance shares was deemed not probable. Note 10. Net Loss Per Share The following table sets forth the computation of basic and diluted net loss per share of common stock attributable to common stockholders: Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 (in thousands, except per-share data) Net loss $ ( 15,920 ) $ ( 17,826 ) $ ( 22,625 ) $ ( 24,302 ) Weighted average common shares outstanding — Basic 17,156 16,500 16,869 16,348 Plus incremental shares from assumed conversions: Dilutive effect of restricted stock — — — — Dilutive effect of stock options — — — — Dilutive effect of warrants — — — — Weighted average common shares outstanding — Diluted 17,156 16,500 16,869 16,348 Net loss per share: Basic $ ( 0.93 ) $ ( 1.08 ) $ ( 1.34 ) $ ( 1.49 ) Diluted $ ( 0.93 ) $ ( 1.08 ) $ ( 1.34 ) $ ( 1.49 ) Incremental shares from stock options and restricted stock awards are computed using the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 (in thousands) Stock options 1,363 1,655 1,384 1,672 Unvested restricted stock awards 908 963 860 915 Warrants 550 550 550 550 Total 2,821 3,168 2,794 3,137 Note 11. Segment Information The following table represents total net revenues based on where customers are physically located: Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 (in thousands) North America $ 32,356 $ 27,384 $ 73,068 $ 58,752 Europe and Middle East 11,861 9,179 21,587 21,301 Asia Pacific 3,765 4,737 4,771 7,909 Total net revenues $ 47,982 $ 41,300 $ 99,426 $ 87,962 14 Note 12. Commitments and Contingencies Litigation The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be determined with certainty, in the Company’s opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity. Shareholders Class Action : On August 5, 2013, VTB Holdings, Inc. (“VTBH”) and the Company (f/k/a Parametric Sound Corporation) announced that they had entered into the Merger Agreement pursuant to which VTBH would acquire an approximately 80 % ownership interest and existing shareholders would maintain an approximately 20 % ownership interest in the combined company (the “Merger”). Following the announcement, several shareholders filed class action lawsuits in California and Nevada seeking to enjoin the Merger. The plaintiffs in each case alleged that members of the Company’s Board of Directors breached their fiduciary duties to the shareholders by agreeing to a merger that allegedly undervalued the Company. VTBH and the Company were named as defendants in these lawsuits under the theory that they had aided and abetted the Company’s Board of Directors in allegedly violating their fiduciary duties. The plaintiffs in both cases sought a preliminary injunction seeking to enjoin closing of the Merger, which, by agreement, was heard by the Nevada court with the California plaintiffs invited to participate. On December 26, 2013, the court in the Nevada case denied the plaintiffs’ motion for a preliminary injunction. Following the closing of the Merger, the Nevada plaintiffs filed a second amended complaint, which made essentially the same allegations and sought monetary damages as well as an order rescinding the Merger. The California plaintiffs dismissed their action without prejudice, and sought to intervene in the Nevada action, which was granted. Subsequent to the intervention, the plaintiffs filed a third amended complaint, which made essentially the same allegations as prior complaints and sought monetary damages. On June 20, 2014, VTBH and the Company moved to dismiss the action, but that motion was denied on August 28, 2014. On September 14, 2017, a unanimous en banc panel of the Nevada Supreme Court granted defendants’ petition for writ of mandamus and ordered the trial court to dismiss the complaint but provided a limited basis upon which plaintiffs could seek to amend their complaint. Plaintiffs amended their complaint on December 1, 2017 to assert the same claims in a derivative capacity on behalf of the Company, as a well as in a direct capacity, against VTBH, Stripes Group, LLC, SG VTB Holdings, LLC, and the former members of the Company’s Board of Directors. All defendants moved to dismiss this amended complaint on January 2, 2018, and those motions were denied on March 13, 2018. Defendants petitioned the Nevada Supreme Court to reverse this ruling on April 18, 2018. On June 15, 2018, the Nevada Supreme Court denied defendants’ writ petition without prejudice. The district court subsequently entered a pretrial schedule and set trial for November 2019. On January 18, 2019, the district court certified a class of shareholders of the Company as of January 15, 2014. On October 11, 2019, the parties notified the district court that they had reached a settlement that would resolve the pending action if ultimately approved by the Court. On January 13, 2020, the district court preliminarily approved the settlement between the plaintiffs and all defendants. A final hearing was held on May 18, 2020, wherein the Court approved the settlement and entered final judgment. On May 22, 2020, PAMTP LLC, which purports to hold the claims of eight shareholders who opted out of the class settlement described above, brought suit against the Company, the Company’s CEO, Juergen Stark, Stripes Group, LLC, SG VTB Holdings, LLC, Kenneth Fox, and former members of the Company’s Board of Directors in Nevada state court. This opt-out action asserts the same direct claims that were asserted by the class of shareholders described above. The defendants filed two motions to dismiss this complaint, which were heard on August 10, 2020. The Court denied those motions by order of August 20, 2020. The case was tried in August 2021 and all remaining defendants, including the Company, prevailed on all counts with final judgment entered in their favor on September 3, 2021. Plaintiff is appealing that judgment. Employment Litigation: On April 20, 2017, a former employee filed an action in the Superior Court for the County of San Diego, State of California. The complaint alleges claims including wrongful termination, retaliation and various other provisions of the California Labor Code. The complaint seeks unspecified economic and non-economic losses, as well as allegedly unpaid wages, unreimbursed business expenses statutory penalties, interest, punitive damages and attorneys’ fees. The Company filed a cross-complaint against the former employee on May 25, 2017 for certain activities related to his employment with the Company. The matter was tried between September 24 and October 7, 2021. On October 8, 2021 a jury rendered a unanimous verdict in favor of the Company on the employment claims. The Court granted a directed verdict to the Company on its Cross- Complaint against the former employee. Judgment was entered in favor of the Company on October 27, 2021. On December 20, 2021, the former employee filed a notice of appeal of the judgment. Intellectual Property Dispute: On November 24, 2020, ABP Technology Limited (ABP) issued a claim for trademark infringement in the High Court of England and Wales against Voyetra Turtle Beach, Inc. (“VTB”) and Turtle Beach Europe Limited (“TB Europe”) relating to the use by VTB and TB Europe of the sign STEALTH on and in relation to gaming headsets in the UK. On November 16, 2022 the parties entered into a confidential settlement agreement in full and final settlement of all claims regarding this matter. Accordingly, the High Court claim has been discontinued. 15 The Company will continue to vigorously defend itself in the foregoing unresolved matters. However, litigation and investigations are inherently uncertain. Accordingly, the Company cannot predict the outcome of these matters. The Company has not recorded any accrual at June 30, 2023 for contingent losses associated with these matters based on its belief that losses, while possible, are not probable. Further, any possible range of loss cannot be reasonably estimated at this time. The unfavorable resolution of these matters could have a material adverse effect on the Company’s business, results of operations, financial condition, or cash flows. The Company is engaged in other legal actions, not described above, arising in the ordinary course of its business and, while there can be no assurance, believes that the ultimate outcome of these other legal actions will not have a material adverse effect on its business, results of operations, financial condition, or cash flows. Warranties The Company warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. Warranties are generally fulfilled by replacing defective products with new products. The following table provides the changes in our product warranty reserve, which are included in accrued liabilities: Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 (in thousands) Warranty, beginning of period $ 616 $ 789 $ 618 $ 856 Warranty costs accrued 190 72 375 193 Settlements of warranty claims ( 166 ) ( 143 ) ( 353 ) ( 331 ) Warranty, end of period $ 640 $ 718 $ 640 $ 718 Operating Leases - Right of Use Assets The Company adopted ASU 2016-02, Leases , on January 1, 2019 . The Company determines whether an arrangement is a lease at inception. The Company leases office spaces that provide for future minimum rental lease payments under non-cancelable operating leases that have remaining lease terms of one year to nine years , and do not contain any material residual value guarantees or material restrictive covenants. The components of the right-of-use assets and lease liabilities were as follows: Balance Sheet Classification June 30, 2023 (in thousands) Right-of-use assets Other assets $ 7,514 Lease liability obligations, current Other current liabilities $ 1,092 Lease liability obligations, noncurrent Other liabilities 7,091 Total lease liability obligations $ 8,183 Weighted-average remaining lease term (in years) 6.3 Weighted-average discount rate 4.3 % During the six months ended June 30, 2023, the Company recognized approximately $ 0.8 million of lease costs in operating expenses and approximately $ 0.6 million of operating cash flows from operating leases. 16 Approximate future minimum lease payments for the Company’s right of use assets over the remaining lease periods as of June 30, 2023, are as follows: (in thousands) 2023 $ 647 2024 1,437 2025 1,451 2026 1,361 2027 1,383 Thereafter 3,182 Total minimum payments 9,461 Less: Imputed interest ( 1,278 ) Total $ 8,183 17